In the world of business, ‘finance’ and ‘economics’ are two words that are often used interchangeably despite the stark differences between them. As an entrepreneur, investor or aspiring business person, it is vital that you understand various business terminology, and this extends to understanding the differences between finance and economics.
Despite their differences, finance and economics are also very closely linked and affect and influence each other in many different ways. The connection between them plays an integral role in the stock market. Here, we look at the key differences (and similarities) between finance and economics and hopefully provide you with a deeper understanding of these terms.
Understanding finance
Finance is actually derived from economics and is often looked at as a specific offshoot of economics (which is broader than finance). Finance pertains to money, and categories that fall within the finance spectrum include money management, investing, banking, credit, financial systems, creation of money, and financial instruments.
There are three main categories of finance, including:
- Personal finance – Personal finance includes all of the personal financial decisions made by an individual in their lifetime, including saving, insurance, mortgages, loans, and planning for retirement.
- Corporate finance – Corporate finance, or business finance, involves managing assets, revenues, debt and liabilities, as well as the average day-to-day financials of a business.
- Public finance – Public finance is made up of larger structures such as tax systems and other financial policies and instruments.
Conversations surrounding finance tend to focus on topics such as money flow, interest rates, investing, and financial markets and structures.
Finance affects the stock market with its constant stream of new financial products and models.
The term ‘finance’ may be used in reference to a loan of sorts. For example, when someone says they are paying off their car finance, they are talking about repaying a loan they took out to purchase their vehicle.
Understanding economics
Now that you have a basic understanding of finance, we can discuss economics. Economics is a far broader term than finance. It is, therefore, slightly more difficult to define. Technically economics is a social science that studies the consumption and production of goods and services within a particular country. Economics attempts to explain how different economies work and interact with one another.
There are two main types of economics, namely:
- Macroeconomics – Macroeconomics examines aggregates. It looks at how the economy as a whole behaves and studies things such as inflation, GDP, national income, and even the unemployment rate.
- Microeconomics – Microeconomics examines how the economy affects the individual and how individual choices, in turn, affect the economy. Microeconomics does not just focus on individuals but also on the economic movements of small and large businesses.
Economics assist greatly in forecasting and determining what results can be expected if certain factors within the economy were to shift. A very simple example would be that if a certain product’s price had to increase dramatically, the result would be that consumers would not buy as many of these products as usual. It also looks at worldwide factors, such as where certain products and raw materials are produced and the effect a sudden mine collapse in South Africa (or something similar) would have on different economies.
When economics is understood in full, the benefits can be immense in terms of making strategic changes in policy, knowing when and where to invest etc.
Should I study finance or economics?
Studying economics usually leads to a career in investment banking, academia (such as teaching and lecturing as well as academic research), consulting, economic forecasting, and so much. Overall, economics will give you the broader picture, while finance will help you zoom into the money aspect of economics.
Those who have studied finance often have careers in investing, banking, accounting, and fund management. Having a financial degree is also great to have if you are looking to hold a senior or management position within a company.
Because finance and economics are so closely linked, many degrees will give you access to both of these subjects. Whether you pursue a career in finance or a career in economics, having knowledge of both subjects will be greatly beneficial to you.
If you are considering studying either finance or economics, why not look at some job listings for your ‘ideal’ job and see which degrees they favour. This should give you a good indication as to which is suitable for you.
Remember that a degree is not the only option you have available to you. There are many fantastic short courses out there that would benefit you greatly if you are looking to gain knowledge!
Why is it so important to use the right terminology?
While using the terms ‘finance’ and ‘economics’ interchangeably may seem harmless, using incorrect business terminology could have detrimental effects. It could make you appear that you may not truly understand what you are talking about, and it could lead to miscommunications between you and various potential investors, clients, employees etc. Doesn’t it make you cringe when an ‘expert’ misuses a word in a sentence?
Ensure that you present a professional demeanour by using terminology correctly and understanding what you are talking about. If there is anything you don’t understand or words you need clarification on, Google is only a couple of clicks away, so ignorance can not be used as an excuse.
If you are an investor, having a deep understanding of finance and economics will help you better understand articles discussing the stock market and help you make better investments.
Over time, economics and finance have become more closely linked than ever. Where economics was once looked to as mostly theoretical, and finance was seen as more practical, now the two have a constant influence over one another.